Brokerage Went Belly Up – Where Are My Investments?

Sep 22, 2012: Many of us have multiple investment accounts in numerous brokerage firms. We know we all love our brokers. Now here is a nightmarish question: What to do if the brokerage firm holding our cash or securities goes bankrupt or loses its records?"

It is a real world out there and things happen. However, in this case there are some rays of hope. Sleep well dear friends as long as your brokerage firm is a member of the Securities Investors Protection Corporation.

What is SIPC?

The SIPC either acts as trustee or works with an independent court-appointed trustee in a missing asset case to recover funds. It ensures that customers of a failed brokerage firm receive all non-negotiable securities that are already registered in their names or in the process of being registered. Thus it acts as the first line of defense for investors in case our brokerage goes belly up. Our monthly account statements and confirmations are sufficient to establish our claim for money or securities. We should indeed keep those records safely in case we need to file a claim with SIPC.

How does it help us?

When a member brokerage firm fails, the SIPC arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. In case it is unable to do so, the failed firm is liquidated. In such a situation, the SIPC sends investors either certificates for the stock that was lost or a check for the market value of the shares. If sufficient funds are not available in the failed firm’s customer accounts, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available but not guaranteed.

So, our investments are insured, right?

No. SIPC is not FDIC (Federal Deposit Insurance Corporation). FDIC provides blanket protection to bank depositors. In contrast, SIPC does not bail out investors when the value of their stocks, bonds and other investments fall for any reason including fraud. So we should not expect SIPC to help us against losses caused by a decline in the market value of our securities.

Hmm..n that would have been real nice eh! SIPC does not cover individuals who have sold worthless stocks and other securities either. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons.

Summary

1. We must verify that a brokerage firm is a member of SIPC before doing any business with it. We can do that by visiting http://www.sipc.org/ or calling the SIPC Membership Department at 202-371-8300.
2. Always safe-keep records and monthly statements.Tip: Buy a fire safe locker.

References: USCourts

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